Bargain hunters fire up rally in cannabis stocks

Ianthus Capital Holdings

24/01/2020 12:00

By David Randall
    NEW YORK, Jan 24 (Reuters) - Some cannabis stocks are seeing
their prices surge as investors hunt for winners in the ashes of
an industry shakeout that hammered share prices last year.  
    Shares of Tilray Inc  TLRY.O  and Canopy Growth Corp
 WEED.TO  have climbed more than 20% since the start of the
year, while Cronos Group Inc  CRON.TO  and Aphria Inc  APHA.TO 
are up more than 10%. The ETFMG Alternative Harvest
exchange-traded fund  MJ.P , which targets the global cannabis
industry, is up 5.8% in that period. 
    A speculative "green rush" fueled by the legalization of
cannabis in Canada and some U.S. states faltered last year, as
investors grew worried about oversupply and whether companies
could bring enough customers out of the black market.
Uncertainties over U.S. regulations and revenue shortfalls
further weighed on the sector. 
    Investors are now betting that some of these companies have
become undervalued. Canopy, for instance, trades 10% below the
average target price among the 22 analysts that cover it,
according to Refinitiv data. Its forward price-to-sales ratio,
meanwhile, is at 16.4, well below its peak of 32.1 it hit in
January 2019 and more than double its low from November. 
    "We went through the golden age and then we fell into the
dark ages where valuations were assuming that these companies
were just dead," said Michael Underhill, chief investment
officer at Capital Innovations. 
    Underhill’s fund owns shares of Canopy and is increasing its
stake in companies such as CBD beverage maker Alkaline Water
Company Inc  WTER.O , cannabis financing company Ianthus Capital
Holdings  IAN.CD , and multi-state cannabis operator Harvest
Health & Recreation Inc  HARV.CD .
    Others are focusing on companies that are not pure plays on
cannabis, which they expect to better weather a tough regulatory
environment in the U.S. 
    Illinois this year became the 11th U.S. state, along with
the District of Columbia, to allow the recreational sale of
cannabis. Yet a ballot measure to legalize recreational use in
Florida, the nation’s third most-populous state, will likely not
appear until at least 2022, according to a note from research
firm Jefferies.
    "Investors have realized that the rollout from a regulatory
perspective isn't as efficient as it should be," said Jason
Wilson, who focuses on cannabis research and banking at ETF
Managers Group, which manages the $810 million ETFMG Alternative
Harvest ETF.
    He is recommending shares of e-cigarette maker Turning Point
Brands Inc  TPB.N .
    Dan Ahrens, portfolio manager of the $49 million
actively-managed AdvisorShares Pure Cannabis ETF  YOLO.P ,
believes the sell-off in cannabis shares was exacerbated by
aggressive short-selling, or investors betting against the
prices of cannabis stocks.
    He is focusing on smaller companies such as Innovative
Industrial Properties Inc  IIPR.N , a real estate investment
trust that leases greenhouses to grow medical-use cannabis, and
cultivators such as Village Farms International Inc  VFF.TO  and
OrganiGram Holdings Inc 
 (Reporting by David Randall
Editing by Ira Iosebashvili and Nick Zieminski)
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters
Messaging: david.randall.thomsonreuters.com@reuters.net))